Before we go about trying to value natural-gas storage, we should try and come up with a list of important considerations in any valuation process. Also, the data requirements should be modest,...
A Consumer Advocate's View: Decoupling and Energy Efficiency
Two sides of the same coin.
When I became the Consumers’ Counsel for the state of Ohio in April 2004, natural-gas prices were hovering between $7/Mcf and $8/Mcf (thousand cubic feet). In the next year and a half, Ohioans saw gas prices double, peaking at a residential statewide average of $16.89/Mcf in the month of September 2005. 1 The latter reflects the exacerbation of prices, already high, by hurricanes Katrina and Rita in the gulf region. Residential customers across Ohio struggled to pay their gas bills. Particularly hard hit were customers in the 150th to 250th percentile of the poverty guideline, for whom no federal or state programs were available. These customers, who traditionally struggle, but manage nevertheless to pay their bills and make ends meet, found themselves overwhelmed.
Prior to the upsurge in natural-gas prices in 2004, energy bills for Ohio’s low-income customers were $740 million more than what is generally accepted as affordable. 2 To say we have a problem on our hands is an understatement.
Although prices might moderate after the Gulf Coast recovers from the hurricanes, the $3/Mcf to $5/Mcf lower prices that customers historically had depended upon in the 1990s probably are gone. 3 Given this, policymakers must search for long-term solutions that maintain the affordability of natural-gas service now and in the long run. Supply options such as increased production from drilling and the importation of liquefied natural gas (LNG) are at least five years away, and there is no guarantee that once available, they will in fact reduce the overall price of gas. 4 These options come to consumers with considerable cost. For example, LNG will be priced on the world market much like oil is today.
Another concern is the long-term availability of supplies to customers. Demand for natural gas in the United States is increasing steadily. In 1990, the United States consumed 19 Tcf (trillion cubic feet). This is expected to escalate to 27 Tcf by 2025. 5 By 2010, natural-gas-fired facilities will comprise 24 percent of the electric generation fleet in the former East Central Area Reliability Council (ECAR) region as opposed to the 11 percent level it was at in 2000.
Moreover, many large industrial customers use dual fuel, switching from oil to natural gas when the oil prices rise. Inasmuch as oil prices have climbed higher than natural-gas prices, industrial customers periodically have availed themselves of natural gas. All this has added to the demand.
A further concern is how the financial markets adversely have affected the prices that consumers are paying. There is a significant disparity between the cost of gas produced at the wellhead and the Henry Hub index price, for example, and the price that natural-gas companies and suppliers